It's been a very long time since I worked with this, but I believe the game upscales from 1024x768 because that is the size set in the UI scripts. I believe the battlescape window size is set in base/ufos/ui/hud_default.ufo:
battlescape battlescape
{
pos "0 0"
size "1024 768"
align LAYOUTALIGN_FILL
}
Try playing around with the size parameter to see if you get any different results.